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Social Security in Malaysia

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Social security traditionally means a social insurance program providing social protection,
or protection against socially recognized conditions, including poverty, old age, disability,
unemployment and others. It also hovers around the subject of social insurance, where people
receive benefits or services in recognition of contributions to an insurance scheme. Providing
services for medical care, aspects of social work and even industrial relations may be included as
part of social security services. Contemporary social security schemes in Malaysia derived its origin
from provisions introduced during the colonial era. The earliest social security provisions were a
workmens compensation scheme, established in 1929, and an employers liability, sickness, and
maternity scheme for plantation workers, introduced in 1933. Present day social protection in
Malaysia is covered in two sectors - the formal sector and informal sector.

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The formal sector in Malaysia comprises organized and registered economic activities
that operate within the legal institutional framework, and generally generate regular wages and
incomes. Employers are required to comply with legal social protection institutions, in particular
old-age savings for all employees and accident/death insurance for low-income workers. Workers
have the option of joining trade unions, although subject to severe restrictions as mentioned above.
Working conditions and hours also have to fall within certain limits, and workplaces abide by safety
regulations.

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Only employees in the government service are entitled to receive pensions upon retirement
while all other employees are required to contribute to an old-age retirement scheme known as the
Employees Provident Fund (EPF) or in Malay, Kumpulan Wang Simpanan Pekerja (KWSP). The
Government Pension Ordinance of 1951 introduced a non-contributory pension scheme for civil
servants, which was amended by the Pensions Act of 1980. This scheme provides income protection
for all employees in the public sector. Benefits include those relevant to employment injury,
disability, superannuation or gratuity payment upon retirement and dependents pension in the event
of death while in service and death after retirement. The generous provisions of the civil service
pension scheme are funded by the government through tax revenues. For the majority of employees
outside the civil service, there is the statutory provident fund that provides retirement benefits under
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the Employee Provident Fund Act, 1951. The EPF scheme consists of individual and entirely
separate accounts for each worker. Contributions are paid by workers and employers. The employer
pays a contribution rate of 12% of the workers monthly rate, while the employee contributes 11%,
and these accumulate to earn dividends until the amount is paid out on the occurrence of the
prescribed contingencies of retirement or death, provided that retirement is not before the statutory
age, initially 55 but revised to 60 under the Minimum Retirement Age Act 2012. Each workers EPF
account is divided into three components. Account 1 comprises 60% of total savings and can be
withdrawn only upon reaching the age of 55 years. The government announced that there are no
immediate plans to raise the EPF withdrawal age to 60. Account 2 comprises 30% of total savings
and withdrawals are allowed for the purpose of purchasing a house, a computer and education. The
last 10% of the savings are deposited into Account 3, and withdrawals are allowed for medical
expenses.

There is also the Employers Liability Scheme (ELS) covers mainly two types of benefits.
Firstly, employment injury compensation and secondly, sickness and maternity benefits. Paid sick
leave entitlement depends on the employees length of service. It ranges from 14 days for those
employed for less than two years, and 18 days for those employed between two to five years, to 22
days if the employee has served the employer for more than five years. All female employees
covered by this scheme are entitled to 60 days maternity leave, subject to a maximum of five
surviving births, plus a maternity benefit which is an amount equivalent to her wages at the time of
confinement. This sum should be paid even if the employee dies (from any cause) during the
maternity leave.

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The Social Security Organization (SOCSO), or its Malay equivalent Pertubuhan
Keselamatan Sosial (PERKESO), covers worker who earn less than RM2,000 a month and is
financed by contributions by the workers and employers. There are two types of benefits that are
administered by SOCSO, namely, the Employment Injury Insurance scheme and the Invalidity
Pension scheme. Under the former, the contribution rate is 1.25% of the employees monthly
earnings, and in the latter scheme it is 1%; the contributions are shared equally between the
employer and the employee. Under the first scheme, the benefits provided include medical benefit,
temporary disability benefit, permanent disability benefit, dependents benefit, death benefit, and
rehabilitation benefit. On the other hand, the Invalidity Pensions scheme provides coverage against
invalidity or death due to any cause. The benefits provided are related to temporary or permanent
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disability and rehabilitation, funeral grant, survivors pension and educational benefits. Benefits are
paid out in the form of periodical payments, calculated on an earnings-related basis.

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Under the Workers Compensation Scheme, the injured or deceased workman is
compensated by his employer, who is required to insure his company against such liabilities. Unlike
SOCSO, this scheme operates as a law governing the terms and amounts of compensation in the
case of death or accident. It does not handle the funds itself; the employer is fully responsible for
the social insurance through private companies. This scheme has also been particularly important to
foreign workers in Malaysia.

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A large section of the population, in particular the self-employed, petty commodity traders,
and those employed in the informal sector, are excluded from any formal social security measures.
In the context of social protection, it is quite likely that these self-employed do not have access to
formal protection, or do not involve themselves in such programmes. Registering as EPF
contributors, for instance, requires declaring incomes that they may not wish to disclose. More often
than not, they are exposed to potential risks from natural, social and economic hazards, are least
protected against these hazards compared to employees in the formal sector. They face economic
insecurity due to unstable income; while at the same time they lack the skills and capital needed to
diversify into other forms of income generating activities or seek better opportunities elsewhere.

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Malaysia is classified as a medium income country with PPP per capita GDP of USD 312.44
billion in 2014 (Trading Economics, 2015) and its latest GDP growth rate is 5.6%. The current
population growth rate is 1.6% and seems likely to decrease in the coming years. Although
Malaysia is not currently an aged society, the proportion of the older population (defined as 60
years or older) is forecast to reach 9.9% by 2020. The older population aged 60 years and over will
likely outnumber the younger population aged 15 years old and below by 2045. It looks like the
current social security structure is still sustainable in the near future, but this could also be seen as
added pressure on the government to provide jobs for the large number of young adults entering the
labour market and at the same time, providing some form of protection for the elderly population.
Globalization has also made safety nets even more essential for three reasons; cushioning the
burden of restructuring, increasing legitimacy of reforms; and enabling risk taking by individuals
and firms by providing a floor level income in the event that risk taking ventures fail to materialise.
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More importantly, an improved coverage will foster social cohesion and sustainable economic
development.

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The Malaysian social security system still suffer some shortcomings. All the schemes
mentioned only cover contributions until the age of 55. After that, the employee has to use his
pension or any other funds. Lump sump withdrawals also leave beneficiaries at danger of using up
the money in a short amount of time. In addition, there is no such thing as unemployment insurance;
the only payments the unemployed receive are the payments of termination as stated in the Labour
Law. Lack of child and family social schemes are just as important an issue as the exclusion of selfemployers from compulsory insurance. Members of low-income groups who are not covered by
social security are at a disadvantage, not only by being excluded in coverage but also as a result of
their contribution to the general taxation.

That said, it is worth mentioning here that there is no perfect social security system in the
world. Each country has its own strengths and weaknesses. Malaysia should look to other countries
and find out how they can further improve on what have been developed. The roles of all the
agencies and ministries in the social security system also need to be relook with better integration to
provide well coordinated care that covers the entire population.

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Appendix

Age structure

Percentage

0-14

28.8

15-24

16.9

25-54

41.2

55-64

7.6

65 and over

5.5

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References
1. Singh S. (2010). Employers must make EPF, Socso contributions to part-timers. The Star Online.
Retrieved 13 January 2015, from http://www.thestar.com.my/story/?sec=nation&file=
%2F2010%2F8%2F18%2Fnation%2F20100818160440

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2. N.A. Social security and welfare benefits in Malaysia. Angloinfo. Retrieved 13 January 2015,
from http://malaysia.angloinfo.com/money/social-security/

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3. Holzmann R. (2014). Old age financial protection in Malaysia. Retrieved 13 January 2015, from
http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/
2014/11/25/000442464_20141125150658/Rendered/PDF
927250NWP014250Box385377B00PUBLIC0.pdf

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